credit suisse global investment yearbook 2010

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Credit Suisse

Global InvestmentReturns Yearbook 2010

Research InstituteFebruary 2010

Credit Suisse Research Institute:Thought leadership from Credit Suisse Researchand the world’s foremost experts



P h o t o s : i s t o c k p h o t o / B e r t l m a n n .

C o v e r : i s t o c k p h o t o / s z e f e i

Contents

05 Emerging markets

13 Economic growth

21 Value in the USA

27 Country profiles

28 Australia

29 Belgium

30 Canada

31 Denmark

32 Finland

33 France

34 Germany

35 Ireland

36 Italy

37 Japan

38 Netherlands

39 New Zealand

40 Norway

41 South Africa

42 Spain

43 Sweden

44 Switzerland

45 United Kingdom

46 United States

47 World

48 World ex-US

49 Europe

50 Authors

51 Imprint/Disclaimer

CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010_2




The Credit Suisse Global Investment Returns Yearbook 2010 offers more than 100 years of data on financial market returns in19 countries, putting into long-run perspective the current out-look for asset prices at a time of global economic recovery andhigh levels of country indebtedness. This year Elroy Dimson,Paul Marsh and Mike Staunton of London Business School addFinland and New Zealand to their database of long-term returnsand risks, alongside the 17 markets previously covered. Thescale of analysis extends far beyond what can be contained inthis Yearbook, so an accompanying volume (the Global Invest-ment Returns Sourcebook) contains detailed tables, charts,listings, background, sources and references for every country.

More specifically, in the context of the already stronggrowth in emerging markets and the rebuilding of developedeconomies, they examine two issues – first, what kinds of returnand risk levels should we expect from emerging market equitiesand, second, what the relationship between stock returns andeconomic growth is. While emerging market equity returns in

2009 were spectacular, this analysis suggests that, throughouthistory, emerging market returns have been closer to developedmarkets than many investors would now expect. The crucialissue is the extent to which emerging markets have undergone astructural improvement in terms of their risk/return profile andthe levels of economic growth they now enjoy.

The second article in the Yearbook helps to shed somelight here. While we observe a positive correlation between long-term economic growth and stock returns, historic per capitaGDP growth has a negative correlation with both stock returnsand dividend growth. If anything, stock market moves are amuch better indicator of future GDP growth. In fact, paradoxi-cally, an investment strategy of investing in countries that haveshown weakness in economic growth has historically earnedhigh returns. 2009 is a case in point.

In addition, theYearbook contains an assessment by Jona-than Wilmot, Chief Global Strategist for Investment Banking, ofthe fundamental outlook for the US market in the context of aglobalized world. He notes that the US market is strongly linkedto emerging world growth as nearly a quarter of total US profitsand about 30% of S&P 500 sales are generated abroad. Heconcludes that the outlook for US equities is positive, givencontinuing globalization, emerging world growth and rapid tech-

nological change.We are proud to be associated with the work of Elroy

Dimson, Paul Marsh and Mike Staunton, whose book Triumph ofthe Optimists (Princeton University Press, 2002) has had amajor influence on investment analysis. TheYearbook is one ofa series of publications from the Credit Suisse Research Insti-tute, which links the internal resources of our extensive researchteams with world-class external research.

Giles KeatingHead ofPrivate Banking Global Research

[email protected]

Stefano NatellaHead of Global Equity Research,Investment Banking

[email protected]

For more information on the findings of theCredit SuisseGlobal Investment Returns Yearbook 2010, please contacteither the authors (see contact information on page 51) or:

Richard Kersley, Head of Equity Research Europe Productat Credit Suisse Investment Banking,[email protected]

Michael O'Sullivan, Head of UK Research,Global Asset Allocation at Credit Suisse Private Banking,michael.o'[email protected]

To order printed copies of the Yearbook and the Sourcebook,see page 51.



P h o t o : i s t o c k p h o t o / h o l g s





Emerging markets have been the hot topic of the past year, butthe story line has evolved. In the turmoil of 2008 and early2009, they crashed along with, and more than, other risk as-sets, shaking investors’ faith in the decoupling theory and indiversification as a way of safeguarding portfolio values.

In the staggering equity market recovery since March 2009(see Figure 1), the picture changed. Belief in decoupling wasback as emerging markets recovered sooner, faster and further,and became the world’s engine of growth and recovery. Thebelief that “future growth means higher returns” gained momen-tum. Meanwhile, the financial crisis shattered the preconceptionthat the USA and other developed markets were relative safehavens. Investors now viewed the risk gap between emergingand developed markets as much smaller.

Are these perceptions correct, and have events been soparadigm-changing that emerging markets are now the onlygame in town? In this article, we seek to answer these questionsby putting the spotlight on the performance of emerging mar-

kets, and their role in a global equity portfolio.In doing so, and consistent with the aims of the Yearbook,

we take a long-run view. A short-term focus on current percep-tions and market beliefs can seriously detract from investmentperformance. Those who follow the herd are destined to sellmarkets after they have fallen, and to buy after a rise.

By examining markets over the longest possible period,modern events can be put in their proper context. This is the roleof the Yearbook, with its 110 years of stock-market history nowexpanded to cover 19 countries, and the even broader databaseof 83 developed and emerging markets that we have assembledfor this and the accompanying article.

What is an emerging market?

There is no watertight definition of emerging markets. The term was coined in the early 1980s by the International Finance Cor-poration (IFC) to refer to middle-to-higher income developingcountries in transition to developed status, which were oftenundergoing rapid growth and industrialization, and which hadstock markets that were increasing in size, activity and quality.

In practice, it is the major index providers, in consultation with their clients, who define which markets are deemed emerg-ing and which are developed. FTSE International distinguishesbetween advanced and secondary emerging markets, while S&P

and MSCI identify a category of pre-emerging, frontier markets.But the key distinction is between emerging and developed.Index providers judge this using their own criteria, such as grossdomestic product (GDP) per capita, the regulatory environment,and market size, quality, depth and breadth. Yet, despite thedifferent criteria, the resultant classifications are almost identical.

EmergingmarketsThe opening years of the twenty-first century have been a lost decade for equity investors, withthe MSCI world index giving a return close to zero. However, emerging markets have been abright spot, with an annualized return of 10%. Looking ahead, can we expect this differential topersist? And what role should emerging markets now have in investors’ portfolios? Answeringthis question is crucial for all individuals who take a global view of stock-market opportunities.

Elroy Dimson, Paul Marsh and Mike Staunton , London Business School




Figure 1 lists the 24 countries currently classified asemerging markets by the major index providers. MSCI views 22of these as emerging, while the remaining two, Argentina andPakistan, are classified as emerging by FTSE, with both MSCIand S&P deeming them to be frontier markets. The S&P andFTSE taxonomies are otherwise almost identical to MSCI’s, theexceptions being that S&P views Colombia as a frontier market;FTSE upgraded Israel to developed in 2008, with MSCI follow-ing in 2010; and FTSE promoted South Korea in 2009, whileS&P also categorizes it as developed, but retains it in their Emerging Plus BMI index.

In the 30 or so years since emerging market indices firstappeared, there have been few upgrades to developed status.

Apart from Israel and Korea, currently in transition, only Portugaland Greece have advanced, and Greece is now on some watchlists for downgrade. Indeed, more emerging markets have been

downgraded to frontier than have been upgraded to developed.S&P’s downgrades include Argentina, Colombia, Jordan, Nige-ria, Pakistan, Sri Lanka, Venezuela and Zimbabwe. Clearly sev-eral markets have failed to emerge as rapidly as once hoped.

Despite multiple factors used by index compilers to deter-mine the boundary between emerging and developed status, asingle variable does an excellent job of discrimination: GDP per capita. Using the most recent IMF projections for end-2009, weranked over 100 countries with active stock markets by their GDP per capita. A cut-off point of USD 25,000 effectivelymarked the boundary between emerging and developed mar-kets. The only emerging market listed in Figure 1 with GDP per capita higher than this was Israel (USD 29,700), which is al-ready in transition to developed status. The only developed mar-kets with lower GDP per capita are Portugal (USD 20,600) andKorea (USD 16,500) which are a 2001 promotion and a transi-tional case, respectively.

Although the term “emerging markets” dates back only tothe early 1980s, emerging markets are not new. Indeed, duringmuch of the nineteenth century, the United States would havebeen regarded as a classic emerging market. The notion thatemerging status can largely be captured by a ranking of GDPper capita allows us to revisit countries back in 1900 at the startof the Yearbook coverage to see which stock markets existingthen might have been deemed emerging at that time.

To do this, we rank all countries by their estimated GDPper capita in 1900 using Maddison’s historical database. Weassess the cutoff by taking the same percentile (30%) of thedistribution that corresponds to the USD 25,000 cutoff in 2010.Using this criterion, only seven of the 38 countries with equitymarkets in 1900 changed status over the following 110 years.Five markets moved from emerging to developed: Finland, Ja-pan and Hong Kong plus, more recently, Portugal and Greece.

Two moved from developed to emerging: Argentina and Chile.Of the remaining 31 countries, 17 would have been deemeddeveloped in 1900 and remain developed today, while 14 wereemerging and are still in that category 110 years later.

Singapore, whose stock market opened in 1911, has alsomoved from emerging to developed status. This gives a total ofsix promotions over 110 years, plus Israel and Korea, currentlyin transition. Thus, although most countries have grown consid-erably in terms of GDP per capita, their relative rankings on thismetric have changed far more slowly.

There are numerous historical reasons why many emergingmarkets have emerged slowly, and why others have sufferedsetbacks. These include dictatorship, corruption, civil strife,

wars, disastrous economic policies and hyperinflation, and com-munism. A combination of several of these factors helps toexplain why Argentina, which in 1900 had a GDP per capitasimilar to that of France, and higher than Sweden and Norway,

Figure 1 Emerging markets’ performance since March 2009 and over the decade 2000 09Source: MSCI Barra; FTSE International

2 55

6468

7477

818181

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107108109

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0 25 50 75 100 125 150 175 200

MoroccoIsrael

MalaysiaPhilippines

MSCI WorldPakistan

ChileCzech Republic

ArgentinaEgyptChina

TaiwanThailand

PeruMSCI Emerging

South AfricaSouth Korea

ColombiaMexicoRussiaPoland

BrazilIndia

IndonesiaTurkey

Hungary

Return from 9 Mar–31 Dec 2009 Annualized return: 2000–09

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TaiwanThailand

PeruMSCI Emerging

South AfricaSouth Korea

ColombiaMexicoRussiaPoland

BrazilIndia

IndonesiaTurkey

Hungary

Return from 9 Mar–31 Dec 2009 Annualized return: 2000–09




is now categorized by MSCI as just a frontier market. Many other markets that were on the brink of becoming developed in theearly twentieth century, such as Hungary, Czechoslovakia, Po-land and Russia, suffered the double blow of wartime destruc-tion and the post-WWII communist yoke. Since the fall of theBerlin Wall twenty years ago, these, and many other countries,including China, have joined the ranks of the rapidly re-emergingmarkets.

How important are emerging markets?

Emerging and frontier markets are far too big to ignore. Theyaccount for more than 70% of the world’s population (over fivetimes that of developed markets), 46% of its land mass (twicethat of developed markets), and 31% of its GDP (almost halfthat of developed markets). And, taken as a group, their realGDP growth has been much faster than in developed markets.

In the following article, we cite a set of projections for fu-ture GDP growth provided to us by PricewaterhouseCoopers as

an update to their recent report on economic growth (see page14). These projections show the by now familiar consensus viewthat key emerging markets, especially the BRICs, will continueto grow rapidly, with China expected to displace the USA as the

world’s largest economy by around 2020, and with India over-taking the USA by 2050.

These are, of course, just projections. While they broadlyreflect the consensus view, emerging markets have been acci-dent prone in the past, and could suffer setbacks in future. Nor should we write off the prospects for the developing world andits stock markets. Nevertheless, it is clear that the world order ischanging fundamentally and quite rapidly.

Market weightings

In Forbes’ 2009 ranking of the top global companies, three ofthe five constituents with the largest market capitalizations arefrom emerging markets. No fewer than 11 of the top 100,ranked by total market capitalization, are from China morethan from any other country in the world apart from the USA.

Perhaps surprisingly, therefore, the weighting of emergingmarkets in the all-world indices published by MSCI and FTSE isonly some 12%. This is because these indices reflect the free-float investable universe from the perspective of a global inves-

tor. In many markets, there are still restrictions on which stocksforeigners can hold, with, for example, Chinese ‘A’ shares stillbeing inaccessible to most investors. Similarly, many largeemerging market stocks have only a small proportion of their shares in public hands. Petrochina, which is currently China’slargest company and the second largest oil company in the worldafter ExxonMobil, has a free float weighting of just 2.5%.

Over an interval of three decades, Figure 2 compares the weighting of emerging equity markets to that of developed mar-kets on two criteria: in the upper panel market size is measuredby GDP, and in the lower panel by market capitalization. Theupper panel shows how the emerging markets’ share of globalGDP has grown discernibly to the point where a worldwideGDP-weighted portfolio would now hold almost 30% of assetsin emerging markets. The lower panel confirms the dramaticincrease in the market capitalization of emerging markets fromsome 2% in 1980 to 12% by end-2009.

Figure 2 Alternative emerging market weights, 1980–2010

Source: Adapted from Jacobs et al, "How Should Private Investors Diversify?", MannheimUniversity 2009; GDP information is from Mitchell, Maddison and IMF; market capitalizationdata is from S&P, MSCI and FTSE; frontier markets are excluded

(a) GDP weights

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Developed: North AmericaDeveloped: EuropeDeveloped: Asia PacificEmerging markets

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If the PwC projections are realized, today’s emerging andfrontier markets will become major constituents of the all-worldportfolio of 2050. Even if emerging market capitalization grewonly in line with GDP, it would account for around 30% of the

world total by 2050. However, the ratio of country capitalization

to GDP tends to rise as markets develop due to increased equityissuance and IPOs. Markets tend to become more open to for-eign investment and free-float rises as firms become less closelyheld. Given these factors, today’s emerging markets could easilyaccount for 40%–50% of total world capitalization by 2050.

Looking ahead, one might decide to invest in national mar-kets in proportion to each country’s GDP. However, this strategyis impossible for global investors in total, who by definition musthold each market in proportion to its free-float capitalization.

Long-term performance and emerging market indices

Emerging markets are often sold on the basis of superior returnscompared to developed markets, but does the long-term recordmatch up to these performance claims? The IFC pioneered thefirst emerging market indices in 1981. Its IFCG (Global) indices,later renamed S&P/IFCG, aimed to cover 70% 80% of eachcountry’s capitalization. The S&P/IFCG Composite starts atend-1984 with 17 constituent countries. We extended it back toend-1975 using IFC country back-histories, and continue after its demise in 2008 by linking it to its successor, the S&PEmerging Plus BMI Index. The resulting 34-year record ofemerging market returns, while brief by Yearbook 110-year standards, is lengthy by emerging market norms.

The dark blue line in Figure 3 shows that USD 100 in-vested at end-1975 in emerging markets became USD 2,215by end-2009, an annualized return of 9.5%. The red line showsthat an equivalent investment in developed markets proxied bythe MSCI World index gave a terminal value of USD 3,037 and

an annualized return of 10.6%. Thus, over the entire 34-year period, emerging markets slightly underperformed.

However, this is not the full picture. In the late 1980s, theS&P/IFCI (Investable) indices were launched, comprisingS&P/IFCG constituents that were legally and practically open to

foreign investors. MSCI and FTSE also introduced similar series.The purple line in Figure 3 shows the MSCI Emerging Marketsindex and the light blue line shows the S&P/IFCI Composite,both with index values rebased to the level of the MSCI World onthe respective index start-dates. From launch through 1991, theinvestable emerging market indices greatly outperformed theS&P/IFCG and MSCI World, largely because they categorizedKorea and Taiwan as non-investable. From 1992 onward, therehave been no appreciable deviations between the performancesof the broader S&P/IFCG and the two investable indices.

Overall, emerging markets underperformed over the period1976 87, but outperformed on a cumulative basis since. How-ever, the outperformance was smaller than some might imagine,and has varied depending on the chosen end-date. For example,by end-1998, emerging markets were behind their developedcounterparts. Then, until end-2002, they were mostly ahead, butthe gap was narrow. This was followed by five years of strongperformance, but by mid-2008 the gap was again small. In the2009 recovery, emerging markets pulled ahead. It is possiblethat long-term performance is flattered by the attention awardedto emerging markets in the light of their recent high returns.

One can also ask who has earned this higher return fromemerging markets. Many investors chase past performance, and

buy more of an asset after its valuation has risen. Consequently,money-weighted performance is inferior to index returns. In,addition, while trading costs shrink when emerging markets arehot, liquidity dries up and costs expand after a decline. This is afurther drag on achievable emerging market returns.

Figure 3 Emerging markets performance, 1975–2009Source: Standard & Poor’s; MSCI Barra; Authors’ analysis.*From 31 December 1975 until 31 December 1984, the S&P/IFCG EM Composite index has been constructed from the S&P/IFCG country back histories and weights; from 31 December 1984 until31 October 2008, it is the S&P/IFCG Emerging Markets Composite index; from 31 October 2008 onwards, it is the S&P Emerging Plus BMI Index

2,215

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S&P/IFCG EM Composite* 9.5% p.a. S&P/IFCI EM CompositeMSCI World Index 10.6% p.a. MSCI EM Index

S&P IFCGEmerging* starts at

100 at end-75

MSCI Emerging starts:rebased to end-87 value

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100 at end-75

MSCI Emerging starts:rebased to end-87 value

MSCI World

S&P IFCI Emerging starts:rebased to end-88 value

MSCI World




Growth and stock returns

The recent excellent performance from emerging market equi-ties, coupled with their robust GDP growth, has led to a resur-gence of the “future growth means higher returns” story.

The first caveat is that, while emerging markets as a wholehave enjoyed higher economic growth, individual markets can beexceptions. By 1980, IFC was compiling indices for 11 emerg-ing markets. Of these, three grew more slowly than developedmarkets over the next 30 years, while Argentina and Zimbabwesuffered a real decline in GDP. The group as a whole enjoyedfaster growth, but outpaced developed markets by only 0.7%per year. By end-1994, emerging market indices were beingcalculated for a much wider set of 29 markets, which now in-cluded China and Russia. Over the 15 years since, the GDP ofthese 29 markets has grown 4% per year faster than for devel-oped markets. Despite this truly impressive overall growth, four emerging markets fell behind their developed counterparts.

The second, and fundamental caveat is that, perhaps sur-prisingly, the fact that emerging markets are projected to growdoes not indicate that they will provide superior investment re-turns. First, we are referring to growth in each country’s realeconomy, which is not the same as growth in stock-marketcapitalization. Second, even growth in market capitalizations maynot provide returns to investors. Third, global investors are oftenunable to share in emerging market returns. Fourth, the compa-nies that benefit from emerging market growth may be in thedeveloped world. Fifth, if there is a consensus that emergingmarket growth will be higher, then this ought already to be re-flected in stock prices. And last, the link between GDP growthand stock returns is empirically far weaker than many suppose.

Turning to the first of these assertions, GDP reflects thelevel of real activity in the economy, and could in principle growin the absence of a stock market. Only two decades ago, Ger-many and Japan were cited as premier models of how GDP cangrow through bank, and not stock-market, financing. Con-versely, the Alternative Investment Market in the UK has grownsignificantly in market capitalization by attracting foreign compa-nies that contribute to the GDP of countries other than Britain.

Second, increases in market capitalization are not the samething as portfolio appreciation. Market capitalization can grow

through privatization, demutualization, deleveraging, acquisition,initial public offerings, equity issuance by listed companies, and

as mentioned above listings by companies that might otherwise be traded elsewhere. None of these factors is necessarily asource of added value for holders of listed shares.

Third, as discussed earlier, particular emerging marketcompanies may be non-investable or have limited free-float.While government, family, cross-holding or domestic investorsmay enjoy value increases, global investors are unable to sharefully in these companies’ performance.

Fourth, there is no clear correspondence between a com-pany’s nationality and its economic exposure. Emerging marketcompanies that trade internationally may be dependent ongrowth in the developed world. Similarly, multinationals in leadingeconomies may be relying on growth in emerging countries.

Fifth, the strong past and projected economic growth ofemerging markets has been common knowledge for many years.

It seems inconceivable that investors have not yet woken to thisstory, or that the implications of this are not already fully im-pounded in emerging market stock prices. Investors can beexpected to trade until there are about as many who think anasset is overpriced as underpriced. For example, investors whofavor China can be expected to bid stocks up to a level thatimpounds expected growth. If investors wait until there is a con-sensus that growth will be high, they will have to pay more, andthat will impair portfolio returns.

Sixth, as we show in our companion article, the supposedlink between economic growth and stock-market performance isstatistically weak and often perverse. Unless an investor isblessed with clairvoyance, there is no evidence that GDP growthis useful as a predictor of superior stock-market returns.

Risk and return

Traditionally, emerging markets have been viewed as riskier thandeveloped markets. The credit crash, with its epicenter in devel-

oped markets, has shifted perceptions, and the risk gap is nowseen as smaller. Some have even claimed that developed mar-kets are now riskier. To investigate this, we look at the data.

Figure 4 shows the historical return and risk from emergingand developed markets. The gray bars show the emerging mar-kets index, namely, the S&P/IFCG Composite from 1976 86and the MSCI Emerging thereafter, while the dark blue barsshow the MSCI World index of developed markets. The left handside of Figure 4 shows the returns by decade. In the late 1970s,emerging markets gave similar returns to those of developedmarkets, but they underperformed in the 1980s and 1990s. Inthe 2000s, however, they beat developed markets by 10% per year.

The equivalent bars on the right hand side of Figure 4 showthat the emerging markets index has been consistently morevolatile than the MSCI World. Although the gap has narrowedsomewhat, even over the most recent decade, emerging marketreturns had an annualized standard deviation of 25%, compared

with 17% for the MSCI World. Holding a diversified portfolio ofemerging markets is still appreciably riskier than a diversifiedportfolio of developed countries

Individual emerging markets (light blue bars) are on averagemuch riskier than individual developed markets (red bars), al-

though their risk has fallen steadily from the 1980s through tothe current decade. Despite this decline, over the most recentdecade, the average emerging market had a volatility of 32.5%versus 23.5% for the average developed market. Indeed, it isthis volatility that explains why the equally weighted averageemerging market return can diverge so much from the weightedindex return (compare the light blue bars with the gray bars onthe left hand side of the figure). This is due to the outlying re-turns from a few, smaller emerging markets.

For global investors, the high volatility of individual marketsdoes not matter, as long as they hold a diversified portfolio ofemerging markets. Indeed, even the higher volatility of theemerging markets index need not in itself concern them. Whatmatters is how much an incremental holding in emerging mar-kets contributes to the risk of their overall portfolio. This ismeasured by the beta or sensitivity of the emerging marketsindex to global markets.




While emerging markets sometimes decouple from devel-oped economies, they remain sensitive to global markets. Figure5 examines months during 2000 09 in which the MSCI Worldboomed or collapsed. The upper panel shows the five worstmonths, and the lower panel, the five best. In bullish months,emerging markets tend to outperform, and in bearish months tounderperform: their beta over the decade was 1.30. This above-average beta is consistent with emerging markets’ poor relativeperformance during the tech-crash and credit crunch, and supe-rior recoveries after the lows of March 2003 and March 2009.

A higher beta implies a higher expected return. In the re-lated Sourcebook, we argue that investors can expect an annu-alized long-run risk premium relative to cash of 3% 3½% fromglobal equities. A beta of 1.3 would imply a higher premium ofapproximately an extra 1½% per annum. As a long-run estimate,this represents the top end of our expectations, as emergingmarkets are likely to mature and become more like developedmarkets, and for the technical reason that future betas tend to

be closer to 1.0 than historical estimates.We should therefore expect a modestly higher return from

emerging markets. This higher return arises not from the spuri-ous growth argument, but from a financial argument as old astime, namely that investors require higher returns for higher risk.

Diversification benefits

Diversification benefits provide a strong motive for investingacross both developed and emerging markets. The benefits aregreatest when correlations between markets are low. Figure 6shows how rolling five-year correlations have changed over time.The light blue line shows that the average correlation betweenpairs of emerging markets has risen sharply from close to zero to0.55 today. But despite this rise, 0.55 remains a low correlation,showing there are still huge benefits to holding diversified portfo-lios of emerging markets, rather than selecting just one or two.

The other lines in Figure 6 reveal a similar pattern. The darkblue line shows the average correlation between pairs of devel-oped markets, while the gray line shows the average across allpairs of emerging and developed markets. However, for a globalinvestor, the key metric is the red line showing the correlationbetween the emerging markets index and the MSCI World.

Figure 6 shows that all correlations have risen sharply, with

a step jump upward over the most recent five-year period. Twofactors are at work. First, there has been a secular increase inglobalization and growing interconnectedness between markets.Second, it is well known that correlations increase greatly duringturbulence or following big downside moves. This explains therecent upward jump, since during the credit crash, all risk assetsfell together, causing investors to complain that diversificationhad let them down just when they needed it most.

For investors who were forced sellers at the market lows ofautumn 2008 or March 2009, this was a major issue. However,knowledge of long-term capital market history should have

warned them that precipitous declines are to be expected fromtime to time, and that when they occur, most risk assets falltogether. For longer term holders, however, while the expecta-tion of such episodes does lower the overall benefits of diversifi-cation, the loss is quite small.

Figure 4

Emerging market risk and return, 1976–2009Source: MSCI Barra; S&P; Authors’ analysis

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Figure 5

Returns in extreme months, 2000–2009Source: Index returns in the most extreme months for the World index using data from MSCI

17%

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MSCI EM MSCI World




This analysis therefore suggests that the most recent cor-relation estimates shown in Figure 6 almost certainly overstateprospective correlations over the next five years unless mar-kets encounter a further shock of the same magnitude as thecredit crash. But even taken at face value, the correlation of0.91 between developed and emerging market indices still indi-cates scope for meaningful risk reduction from diversificationbetween emerging and developed markets.

The attractions of investing in emerging markets depend onan investor’s starting point. Consider an equity investor whoseholdings are entirely in developed markets. A small position inemerging markets will disproportionately reduce portfolio volatil-ity. For example, a 1% reallocation to emerging equities willreduce portfolio volatility by more than 1%. Even if emergingequities offer the same expected return as developed equities, itis worth reallocating some of a portfolio to emerging markets.

The position of an investor located in an emerging market, whose holdings are entirely in that country’s market, is different.

For this individual, there is a potentially large benefit from reallo-cating assets to other worldwide markets. The reduced volatilityof a global strategy is so appealing that it will be worth pursuingeven if the expected return from foreign markets is lower.

Understanding the emerging world

Emerging markets are now mainstream investments with a keyrole and essential position in global portfolios. Furthermore, theimportance of today’s emerging markets will continue to rise, as

will their weightings in world indices. Emerging markets, bothindividually and as an asset class remain riskier than developedmarkets, but the gap has narrowed. Meanwhile, they offer diver-sification benefits through exposure to different economies andsectors at different stages of growth. This can help to reduceoverall portfolio risk when emerging markets are blended with aportfolio of developed market securities.

At the same time, the case for emerging markets is oftenoversold. Almost certainly, the implications of their faster growthare already impounded in market valuations. Their longer termreturns have been less stellar than many imagine. And while theyhave outperformed developed markets by 10% per annum over the last decade, it would be unwise to expect this to persist. Onthe assumption that emerging markets have not currently over-

reached themselves, we estimate that, over the long run, their expected outperformance will be closer to 1½% per annum and this reflects compensation for their higher risk.

Nor would it be sensible to write off the prospects for de-veloped markets, despite the gloom surrounding their currentstate. They should remain the main focus of analytical effort, asglobal investment will remain weighted towards today’s devel-oped markets for at least the next two decades. However, it isclearly no longer possible to assess developed market prospects

without a deep understanding of the emerging world.

Figure 6

Correlations between markets, 1976–2009Source: The rolling 5-year correlations were computed by the authors using data from S&P andMSCI Barra



P h o t o : i s t o c k p h o t o / a n t o n i o d a l b o r e





The past year saw a remarkable recovery in global equities withthe MSCI world index rising 74% from its March low. This waspartly fueled by relief that financial Armageddon had beenaverted and partly by anticipation of a rapid return to growth.However, these market movements must have seemed deeplypuzzling to the average citizen of the developed world, where

economies remained weakened and fragile.Last year also saw a two-speed world. Emerging market

equities greatly outpaced their developed counterparts, whileparts of the emerging world, especially China, enjoyed robustgrowth, while other economies still languished (see Table 1).

These observations raise two key questions. First, is eco-nomic growth a reliable predictor of future equity returns? Sec-ond, are equity markets a reliable predictor of future growth?

To many investors the answer to the first question is self-evident. They have decided to “follow the growth” because“higher growth means higher returns”. However, this strategy isnow more expensive to implement. Switching from the higher growth markets in the top part of Table 1 to the more distressedeconomies shown in the lower part would today buy less thanthree-quarters of the holdings in “growth” markets that couldhave been purchased in March 2009. Switching in the other direction would today buy a 35% larger holding in the distressed

economies than could have been bought in March 2009. As sooften happens, just when growth looks more assured, stockprices have risen. The growth markets offer participation in ex-panding economies, but at a higher price. If prices go too high,then the slow-growing markets will offer better value.

Looking back, many high-growth economies have enjoyed

high equity returns, and vice versa. If we were clairvoyant, we would favor equities in countries that are destined to prosper.

EconomicgrowthIn 2009, stock markets rallied. Should investors now focus on countries that still hope for recov-ery, or on those that are experiencing high economic growth? This is the old value-versus-growthdilemma, but on a global scale. Looking at 83 countries over 110 years, we find no evidencethat investing in growth economies produced superior returns. However, we do find that stockmarkets incorporate predictions of future economic growth. When markets recover, economiestend to follow.

Elroy Dimson, Paul Marsh and Mike Staunton , London Business School

Table 1

Real GDP growth and annualized equity returnsSource: IMF, DMS, S&P. All data is local currency, real terms, annualized.(* In the final column, Indonesia is from 1990, and China and Sri Lanka are from 1993)

Jan–Dec 2009 2000–2009 1985–2009*

Country GDP % Return % GDP % Return % GDP % Return %China 8.7 68 9.9 7.7 9.9 2.6India 5.6 72 7.0 9.5 6.2 11.2Indonesia 4.0 96 5.1 6.8 4.7 0.4Sri Lanka 3.0 111 4.9 9.4 4.7 2.2Brazil 0.4 67 3.2 13.9 2.9 11.1France 2.3 28 1.5 1.8 1.9 8.7USA 2.5 25 1.9 2.7 2.8 7.3UK 4.8 28 1.8 1.0 2.4 6.7Germany 4.8 24 0.8 2.5 1.8 6.1

Japan 5.3 9 0.7 4.8 1.9 0.2




But we are not clairvoyant. Should we then buy equities in coun-tries that, prior to our purchase date, have experienced eco-nomic growth? In other words, does a record of high growthindicate that stock returns will subsequently be high? Or byfollowing such a strategy, do we end up overpaying for growth.

Value and growth investors have been grappling with thesekinds of dilemmas for decades when they select stocks withinequity markets. We are focusing here on the analogous problemof selecting between growth and value economies.

The plan of our article is therefore as follows. We start witha review of longer term trends in, and projections of, economicgrowth. The economic landscape is undergoing a transformation,and we need to interpret the impact of this for portfolio strategy.

We then address our first question, which is whether economic growth is a reliable indicator of future equity returns.We draw on the Yearbook’s extensive database, analyzing over 3,000 country years of data to show that, over the long haul,there is no clear relationship between changes in real GDP per

capita and stock market performance; and over the short term,there is no simple formula that can guide investment decisions.

Our second question is whether stock markets can predicteconomic growth. We show that, across countries and years,stock market returns provide a useful indication of future growthin GDP per capita.

The changing economic landscape

The stock markets of the G7 countries account for 71% of globalequity market capitalization. Currently, emerging markets repre-

sent only 12% of global capitalization, but their national econo-mies are growing fast. These countries will become increasinglyimportant to investors as their stock markets grow in value.

In an analogy with the G7 nations, the seven emergingmarkets of China, India, Brazil, Russia, Mexico, Indonesia andTurkey are sometimes referred to as the E7. A recent PwCreport compares the E7 with the G7 nations with projections to2050. The authors, John Hawksworth and Gordon Cookson,have provided us with updated projections based on the latestavailable data. They conclude that the E7 economies will bemore than 50% larger than the current G7 by 2050. China isexpected to overtake the USA in about a decade from now,

while India will have overtaken the USA by 2050.Figure 1 presents the past and projected GDP for selected

countries. Each country is represented by a color, and for eachyear, countries are ranked from the largest to the smallest GDP.Note the predicted ascent of China and India, and the forecast

waning of European countries. The magnitude of the GDPs at

each date is represented by the size of the bubbles. Althoughthe GDP of developed economies is expected to rise, China andIndia migrate from being a speck on the chart in the last centuryto being among the economies that are forecast, by the middleof this century, to be centers of economic wealth and growth.

As we noted in the previous article, these are simply projec-tions, but they do signal a revolution in the global balance ofeconomic power. Economic growth patterns are changing theshape of our world and our investment universe. We need tounderstand the implications of this for investment strategy.

Figure 1 Developed and emerging market GDPs, 1950–2050Source: Data from World Bank and The World in 2050, PricewaterhouseCoopers 2008; updates from John Hawksworth and Gordon Cookson; authors’ analysis




Economic growth and stock-market performance

The conventional view is that, over the long run, corporate earn-ings will constitute a roughly constant share of national income,and so dividends ought to grow at a similar rate to the overalleconomy. This suggests that fast-growing economies will ex-perience higher growth in real dividends, and hence higher stockreturns. Consistent with this, the 19 Yearbook countries had apositive correlation (0.41) between their 110-year real growthrate for overall GDP and their annualized real equity returns.

However, growth in GDP has two components: growth inper capita GDP and population increases. While many Europeancountries, such as the UK, France, Belgium, and Ireland, experi-enced modest (50%–60%) population growth between 1900and 2009, the New World grew much faster. The US populationexpanded by 308%, and the increase was even larger in Austra-lia (479%), New Zealand (423%), Canada (524%), and South

Africa (953%). In common with other researchers, when making

long run economic growth comparisons, we therefore focus onchanges in GDP per capita. This controls for population growththus providing a more direct measure of growth in prosperity.

Figure 2 ranks the real equity return of the 19 Yearbook countries over the period 1900–2009, from lowest to highest. Itshows that there is a high correlation (0.87) between real equityreturns and real dividend growth across the 19 countries. How-ever, the claim that real dividends grow at the same rate as realGDP is clearly incorrect. Real dividend growth has lagged behindreal GDP per capita growth in all but one country, averaging just–0.1%, and the correlation between the two is –0.30. Evenmore importantly, Figure 2 shows that the supposed associationbetween long-run real growth in GDP per capita and real equityreturns is simply not there (the correlation is –0.23).

There are many possible explanations for these findings.For example, Rob Arnott and William Bernstein have pointed outthat the growth of listed companies contributes only a part of anation’s increase in GDP. In entrepreneurial countries, newprivate enterprises contribute to GDP growth but not to thedividends of public companies. There is thus a gap betweenlong-term economic growth and dividend and earnings growth. Italso helps explain why the relationship between GDP growth andstock returns is so noisy. The relationship may be further com-

plicated by the fact that successful countries attract immigrants, which impacts on their GDP per capita.

Similarly, Jeremy Siegel has pointed out that the largestfirms quoted on most national markets are multinationals whoseprofits depend on worldwide, rather than domestic, economicgrowth. He has also argued that markets anticipate economicgrowth, but that in some cases (e.g. Japan) investors’ expecta-tions subsequently proved overly optimistic.

Whatever the explanation, the absence of a clear-cut rela-tionship between economic growth and stock returns should giveinvestors pause for thought. But at the same time, this findingshould emphatically not be interpreted as evidence that eco-nomic growth is irrelevant. The prosperity of companies, and theinvestors who own them, will clearly, at any point in time, dependon the state of both national economies and the global economy.To verify this, we look next at the relationship over time betweenstock returns and GDP growth focusing on the US market.

Figure 2

Returns, dividends, and GDP growth, 1900–2009Source: Dimson, Marsh, Staunton, Triumph of the Optimists; authors’ updates

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I ta Bel Ger Fra Spa Ire Jap Nor Swi DenNet Fin UK CanNZ US SweSAfAus

Annualized real rate (%)

Real equity return Real dividend growth Real GDP per capita growth

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Real equity return Real dividend growth Real GDP per capita growth




Stock returns and GDP growth over time

Figure 3 shows the contemporaneous impact of quarterly GDPchanges on the level of the US stock market. The line of best fit(in blue) has a slope coefficient of 0.41, indicating that a 2.5%increase in the GDP growth rate is associated with an equityreturn that is higher by one percentage point (0.41 x 2.5% =1.0%). The regression relationship is statistically significant (the t-statistic is 3.90) and the adjusted R-squared is 5%.

In practice, this contemporaneous relationship cannot beused to predict investment returns. This is because GDPs arenot published until after the quarter, and are then extensivelyrevised, with revisions that are often of the same magnitude asthe announced growth figure. The final figures plotted in Figure3 would not have been known until several quarters later.

A more formal analysis is presented in Table 2. GDP datafor the same quarter explains a useful proportion of this quar-ter’s equity return (i.e., it has an R-squared of 5.4%). GDP data

for the prior quarter explains something (2.5%), too. But whenregressing returns on the GDP change from two quarters earlier,the model’s explanatory power drops to zero (see the last col-umn). In summary, accurate predictions of GDP growth could beinformative about stock market movements, but realized GDPgrowth rates are no use for predicting quarterly market returns.

Figure 4 extends our analysis to longer investment intervalsand multiple markets. We compile data on 83 national markets:the 19 Yearbook countries plus an additional 64 stock marketsfor which total returns (including dividends) are available. For 20different countries, there is well over half a century of data; for 40 there is at least a quarter century of data; for 78 there ismore than a decade of data; and for five the dataset spans justten years. Our world equity index has a 110-year history

Figure 4 plots per capita real GDP growth against real eq-uity returns over 183 investment periods, each lasting a decade.Over the 1970s (in gray), there was a correlation across 23countries of 0.61. During the 1980s (in light blue) there was acorrelation across 33 countries of 0.33. In the 1990s (in darkblue), the correlation across 44 countries was –0.14. Finally,over the 2000s (in red) the correlation across 83 countries was0.22. Pooling all observations in Figure 4, the low correlation(0.12) between growth in per capita real GDP and real equity

returns is statistically insignificant. The R-squared of one percent(0.12 2) reveals that 99% of the variability of equity returns isassociated with factors other than changes in GDP. Even over an interval of a decade, the association between economicgrowth and stock-market performance is tenuous.

To sum up, we find no evidence of economic growth beinga predictor of stock market performance. Our second question is

whether stock markets are informative about future growth.

Does the market predict economic growth?

To address our second question, we blend our single countryperspective (Figure 3) with our longer-term international analysis(Figure 4). We run regressions to predict annual GDP growthfrom equity returns for all 83 individual markets and for the worldindex for brevity, we report only the latter and for a pooledsample of all markets (measured here in common currency, USDterms) commencing in both 1900 and 1950.

Figure 3

US equity returns vs. GDP growth, 1947–2009Source: Quarterly data from US Bureau of Economic Analysis; Dimson, Marsh, Staunton

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Real equityreturn (%)

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Real equityreturn (%)

Table 2

Regression of US returns on quarterly GDP growthSource: US Bureau of Economic analysis; Dimson, Marsh, Staunton

Return during the

quarter

GDP growth in

same quarter

GDP growth in

prior quarter

GDP growth 2

quarters beforeSlope coefficient 0.41 0.29 –0.00(t-statistic) (3.91) (2.72) (–0.04)No. of quarters 250 249 248

Adjusted R-squared (%) 5.4 2.5 –0.0

Figure 4

Global equity returns vs. GDP growth, 1970–2009Source: S&P; MSCI Barra; Morningstar; Global Financial Data; Mitchell; Maddison; DMS

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2000s 1990s 1980s 1970s

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We have already noted that countries do not issue GDPstatistics at the year-end, and instead publish delayed estimatesthat are subject to revision. We find that there is no relationshipbetween annual GDP growth rates and contemporaneous stockmarket returns. Regressions of individual countries’ annual GDPgrowth on local-currency real returns, have an adjusted R-squared that is on average zero and in most cases negative.

To infer GDP expectations from equity returns in prior years, we therefore estimate regressions that employ prior-year market returns to predict GDP growth. For nearly all of the 83countries, the equity return over the prior year is positively re-lated to subsequent GDP growth. The t-statistic is on average1.84, which is high considering how short many time series are.

Table 3 reports regression coefficients for the world indexand for a pooled dataset of all individual markets. The worldindex reveals a relationship between GDP growth and equityreturn in the preceding year, with a highly significant t-statistic(2.8). The market’s performance in the year before that is not

significant. For individual markets, the pooled regression showsthat, as for the world, there is a highly significant relationshipbetween GDP growth and the equity return in the previous year.The coefficient on the return two years previously is closer tozero and, for the full 110-year period, non-significant. Localcurrency regressions for the 83 individual countries (not reportedhere) have an adjusted R-squared that averages 13%.

In Table 4, we analyze portfolio performance based on his-torical GDP growth measured over a prior interval. For eachyear, we assemble quintiles ranging from the lowest to the high-est growth economies. We use these GDP quintiles to makeportfolio decisions based solely on knowledge of past GDPs.There is no evidence of outperformance by high-growth econo-mies. Historically, the total return from buying stocks in the low-growth countries has equaled or exceeded the return from buy-ing stocks in the high-growth economies.

There has been greater variability from investing in econo-mies with particularly high or low growth than from mid-rankedeconomies. Consequently, over the entire 110 years, the SharpeRatio (the ratio of excess return on the portfolio to its annualstandard deviation) is relatively similar across strategies, as canbe seen in Table 5. Only in the post-1972 subsample (therightmost column), when stocks in low-growth economies sub-

sequently performed well, is there a record of superior risk-adjusted outperformance. Much of this outperformance may beattributed to the emerging markets.

The patterns of equity returns reported in these tables aresimilar whether economic growth is measured over an interval ofone, two, three, four, or five years. The results are robust to thelength of holding period and to whether performance is meas-ured in common currency (e.g. USD) or in real local currency.

Profits from prescience

Buying growth markets fails to outperform because marketsanticipate economic growth. But if that is the case, a perfectforecast of next year’s economic growth could be very valuable.In Table 6, we calculate the US dollar return that would havebeen achieved by an equity investor who presciently buys eachportfolio with foresight about next year’s GDP. This hypotheticalstrategy did, indeed, offer outstanding performance.

Table 3 Regression of annual GDP growth on equity returnsSource: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;Global Financial Data; Mitchell; Maddison; DMS. All data in USD.(* Regressions using country/year dummies.

†99.9% significance level. not significant at 95%)

Independent variablemeasured in real USD

World index 1900–2009

All markets1900–2009*

All markets1950–2009*

Return 1 year before 0.10†

0.01†

0.02†

Return 2 years before –0.06 0.00 0.00 † No. of observations 108 3249 2337

Adjusted R-squared (%) 6 6 30

Table 4

Returns on markets ranked by past GDP growthSource: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;Global Financial Data; Mitchell; Maddison; DMS. All data in USD.(* GDP data commencing as close as possible to 1900 or to 1972)

GDP ranked by 5-year past growth

19 countries1900–2009

83 countries1900–2009*


Lowest growth 10.9 14.1 25.1Lower growth 9.3 11.7 18.6Middling growth 10.1 10.6 16.2Higher growth 7.8 9.0 11.9Highest growth 11.1 13.1 18.4

Table 5

Sharpe ratios for markets ranked by past growthSource: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;Global Financial Data; Mitchell; Maddison; DMS. All data in USD.(* GDP data commencing as close as possible to 1900 or to 1972)

GDP ranked by 5-year past growth




Lowest growth 0.51 0.56 0.85Lower growth 0.53 0.61 0.84Middling growth 0.59 0.57 0.73Higher growth 0.47 0.52 0.57Highest growth 0.55 0.60 0.69

Table 6

Returns on markets ranked by future GDP growthSource: Dimson, Marsh and Staunton analysis using data from S&P; MSCI Barra; Morningstar;Global Financial Data; Mitchell; Maddison; DMS. All data in USD.(* GDP data commencing as close as possible to 1900 or to 1972)

GDP ranked by 1-year future growth




Lowest growth 7.5 9.5 12.0Lower growth 9.1 9.6 11.7Middling growth 10.1 10.6 15.8

Higher growth 10.7 13.0 20.9Highest growth 11.7 13.7 27.9




On the left-hand side of Table 6, we display the annualizedreturns for quintiles 1–5 of the 19 Yearbook countries; in themiddle the corresponding quintile returns since 1900 for all 83countries; and on the right-hand side the quintile returns since1972 for the 83 countries. For the 19 Yearbook countries,buying the equities of next year’s highest-growth economies

would have generated an 11.7% annualized real return, com-pared to 7.5% for next year’s lowest-growth economies. For all83 countries over the period 1972 2009, buying the equities ofnext year’s highest-growth economies would have generated an

annualized real return of 27.9%, compared to 12.0% for thelowest-growth economies.

Accurate predictions of future economic growth wouldtherefore be of great value. In reality, however, investors cannotdivine future growth. They do not even know the growth rate for a year that has recently ended because national statistical of-fices require sometimes lengthy periods to finalize the year’sGDP. Investors have no choice but to extrapolate economicgrowth into the future. This is tricky because markets alreadyanticipate future growth, and it is challenging to beat investors’consensus growth predictions.

Why has low growth beaten high growth?

The recent economic downturn has been the deepest in manycountries since the 1930s. Yet from their low in early March2009, most stock markets have rallied sharply and, for somecountries, economic growth has been restored.

Many investors have reverted to the view that investing infast-growing economies will generate superior equity returns.But historically, that strategy has failed to deliver superior per-formance. Over the long run, there is not a positive associationbetween a country’s real growth in per capita GDP and the realreturns from its stock market. In recent decades, investors havehistorically earned the highest returns though with greater risk

by adopting a policy of investing in countries that have shownrecent economic weakness, rather than investing in those coun-tries that have grown most rapidly.

What explains the disappointing returns from investing inhigh-growth economies? The simplest explanation is that, in ahorse race between low-growth and high-growth economies,there had to be a winner, but the outcome may simply be amatter of luck. For example, low-growth economies may havehad resources that with hindsight were undervalued by in-vestors; or they may have had a high probability of collapse,

whereas the outcome was survival by more of them than inves-tors had anticipated.

A second, behaviorally motivated, explanation is that inves-tors shun the equities of distressed countries, and bid up the

prices of assets in growing economies to unrealistic levels. Evenif this over-valuation of growth assets is apparent to sophisti-cated investors, it is hard to take advantage of it. Short-sellingthe stocks of fast-growing countries may be costly and risky.

A third explanation is that stock prices reflect projectedcash flows and their riskiness. When an economy grows, divi-




dends are likely to rise and risk is reduced, and the equity riskpremium shrinks. So stocks should appreciate, partly becausethe forward-looking equity risk premium has become smaller.With a smaller equity risk premium, subsequent equity returnsshould be expected to be lower. In other words, if the marketfunctions effectively, stock returns should decline after economicgrowth, and should increase after economic decline. That is

what we find. At the same time, the stock market discounts anticipated

economic conditions. In other words, if the market is effective, we should also find that stock prices are a predictor of futureeconomic growth. That, too, is what we find.

Markets are a potentially useful leading indicator of futureeconomic growth, though their predictive power is limited. Iffuture growth were known, then investors should buy the stocksof these growing economies. Past economic growth, however,does not act as a leading indicator of superior stock returns.

Seeking value in international markets

This article has revealed the consistency between strategies thathave performed well within markets and those that have per-formed well across markets. Within markets, value investing hasprevailed. Value stocks – which have low growth prospects anda low share price relative to fundamentals – have achieved supe-rior long-run returns. Growth stocks – which have a share pricethat is high relative to fundamentals – have had inferior long-runreturns.

Internationally, investors can choose between low-growth or high-growth countries. The low-growth countries are makingpoor progress economically or are experiencing setbacks thatmay be overcome. The high-growth countries are expected toachieve speedy and sustained economic advancement. We findthat investing in economies that have achieved high growth rateshas failed to deliver better long-run investment returns.

This does not mean that investors should avoid growth in-vesting. Within a single country’s stock market, investors gaindiversification benefits from holding a broad spread of securitiesin their portfolios. The same is true internationally. Investorsshould ensure that their global portfolio is diversified across slowand fast-growing economies.



P h o t o : i s t o c k p h o t o / N i k a d a





Persistence and overshooting are the two most striking featuresof the long-run US data. Trend GDP growth has gradually de-clined from 3¾% per annum in the early 19th century to below3% per annum more recently, as population growth has slowed.But productivity, profits and equity returns exhibit roughly linear growth for at least the last 100 years, (about 2% per annum for the first two, over 6% p.a. for the latter).

Cyclical fluctuations around these long trends can be verylarge. At the peak of the tech bubble in March 2000, real equityreturns were 2.4 standard deviations above trend, or about 13years of trend performance ahead of themselves, worse than in1929. At their extreme trough in 1932, real returns were 3.4standard deviations below trend, some 19 years behind. Andparticularly extreme falls in corporate earnings were experiencedfrom 1916 to 1921, and in the banking panic of 2008/9.

Despite these huge overshoots, the core trends have sur-vived among other things several major banking panics, four major oil shocks, three depressions, two world wars, nuclear

competition with the Soviet Union, protectionism, the swingingsixties, race riots, imperial overstretch in Vietnam, big govern-ment, small government and countless prophecies of decline.

Talk of American decline is back in fashion and claims thatUS equities are expensive after their dramatic post-crash re-bound are common. At the time of writing, for example, the front

cover of "The Economist" sports the headline "Bubble Warning"and the subtitle "Why assets are overvalued." So here we exam-ine what “persistence” and “overshooting” can tell us about thevaluation debate and the case for (global) equities going forward.

A macro slant on valuation

In theory, the correct price of any asset is simply “the presentvalue of all expected future cash flows from that asset.” Thehard part is to figure out what the expected cash flows are –especially since these cash flows may stretch out 30 years or more – and to apply a suitable discount rate. And this is wherehuman psychology enters in. Given the size of the overshoots ofearnings and returns, there is a natural human tendency to beover-pessimistic at market troughs and over-optimistic at marketpeaks. And the most vocal pundits seldom admit that certaintyabout future cash flows, and even about the right discount rateto apply, is not a human prerogative.

What we can say in real time is more limited: namely that

after certain episodes of rapid earnings growth and prosperity“expected future cash flows” can become dangerously un-bounded, to the point of irrationality (for example, projectingcorporate earnings or dividend growth to exceed nominal GDPgrowth more or less indefinitely). Equally, and especially perhaps

when nominal or real bond yields are very low, bubble valuations

Valuein the USA

As recently as 1890, the US and Chinese economies were about the same size, each account-ing for about 13% of world GDP. Today China’s share is back to its 1890 level, but rising rap-idly, while the US share is about 20%, but falling slowly. Even so, the broad US equity marketstill accounts for around 40% of world equity market capitalization – three times bigger than allemerging markets plus Hong Kong. Moreover, nearly a quarter of total US profits and about

30% of S&P 500 sales are generated abroad. So the US market is still far and away the biggestequity market in the world and strongly linked to emerging growth. It is unlikely that the emerging world can prosper if the USA fails, and vice versa.

Jonathon Wilmot, Chief Global Strategist, Credit Suisse Investment Banking




might be the result of applying an implausibly low discount rate toquite sensible expectations of future cash flows. Exactly oppositeconclusions apply after major negative shocks or when real bondyields are unusually high. To us, however, the long-term data canbe used to help lean against this natural human tendency to feel

what the crowd feels and to mistake cyclical overshoots for changes in the secular trend. The first line of defense is to makethe simplifying, though simplistic, assumption that the long-runtrend in US real equity returns is indeed about 6% per annum, asshown in Figure 3. The extreme overshoots are identified in thecharts and tables.

Persistence and overshooting

While this “persistence” is puzzling to many fundamental analysts, we used it in 1999/2000, at the peak of the tech bubble, tosuggest that the US market looked even more overvalued than in1929. This was of course not a popular message at the time. Inthe event, US real equity returns between March 2000 and March

2009 were lower than in any previous 9-year period, producingnegative returns even greater than the period from October 1929to October 1938 (US equities also managed to clock up a dismalrecord for the worst decade ever).

Assuming “persistence,” what can be said now? First, thatthe market appeared very but not outrageously “cheap” in Febru-ary/March last year, when the authorities managed to restorefunding liquidity to the financial system and prevent a completebreakdown of the global banking and credit system. Second, thateven after rebounding some 70%, real returns are still slightlybelow trend: there is no sign from this metric that equities are in abubble. And third, that the historical pattern shows quite clearlyhow little time the market spends in the vicinity of its long-termtrend. This is also true for many other more recognized valuationmeasures, suggesting that it is seldom useful to base one’s in-vestment strategy on valuation arguments, unless and until theyare at genuine extremes.

Another possible line of defense for investors is to triangulateacross different valuation measures. For example, it is interestingto compare our real returns series with Tobin’s Q. Colloquially, thiscan be thought of dividing how much it would cost to “buy” theexisting private sector capital stock through the equity market byits estimated replacement cost. As with many other valuation

measures there are some tricky measurement issues, but Figure 4compares the most widely cited version of Tobin’s Q for the USmarket with the log deviation of real equity returns from trend. Thetwo measures move roughly in tandem, but with a tendency for Tobin Q to trend up relative to the deviation of returns measure.

A possible explanation for this is that the common measuresof Tobin’s Q will underestimate replacement cost when there is asignificant element of “intangible capital” built into the share price.For individual firms, this can mean knowledge, goodwill, unex-ploited patents or technology, and so on. For the market as a

whole, it could be extended to include the possibility of positivenetwork effects or externalities from evolving technologies or innovation. Either way, measured Tobin’s Q is more likely to ex-ceed 1 in a knowledge-based economy in which intangible capitalis increasingly important, but hard for accountants to measureaccurately. That description seems to fit the evolution of the USeconomy rather well, and might lead one to expect a (steady)

Figure 2

US real earnings per share (log levels)Source: Credit Suisse

Figure 1

US real GDP per capitaSource: Credit Suisse




Table 1

Secular undershootsSource: Credit Suisse

Year Trough in real equity returns

(no. of years behind trend)

Multiple of trend

earnings at trough1857 13.1 1932 19.1 5.91938 10.1 11.01942 13.8 6.81974 9.7 10.21982 11.9 7.32009 8.5 13.1

Table 2

Secular overshootsSource: Credit Suisse

Year Trough in real equity returns(no.of years ahead trend)

Multiple of trendearnings at peak

1881 8.5 19.61906 8.5 20.41929 9.8 30.81968 9.2 25.21998 10.8 34.32000 13.4 39.52007 4.8 29.2

Optimism and pessimism

All of these points are arguable – indeed several books could be written on each one of them. But here we confine ourselves tothree observations. First, optimism and pessimism are highlysocial and contagious phenomena: even highly intelligent andexperienced investors tend to become excessively optimisticafter a good run of growth, wealth creation and prosperity, andexcessively pessimistic after a crash. Moreover, as JeremySiegel has noted: "A history of the market suggests that there isfar more “irrational despondency” at market bottoms than “irra-tional exuberance” at market peaks."1

Second, much of the current obsession with bubbles is pol-icy related, and directly relates to the fear that ultra-low interestrates will foster another bubble if left in place too long. But mostdeveloped-world yield curves are steep, and longer-dated for-

ward yields (both nominal and real) are both considerably higher than rates are today and in line with longer-term growth rates of

the economy (the UK index-linked market is a notable exceptionhere). For the most part, therefore, investors are unlikely to beusing an inappropriately low risk-free rate in their present valuecalculations.

Third, we know from the simpler versions of the dividenddiscount model that the value of an individual equity or of a stockmarket goes up exponentially as the discount rate and expectedfuture growth rate of cash flows start to converge. This is muchmore likely to be true in emerging Asia, where structurally highgrowth rates are combined with structurally low interest rates. Ifanything, emerging equities are probably more bubble pronethan developed markets right now.

US market trading at a plausible multiple

By contrast, a simple regression relating real government or corporate bond yields to the “trend P/E” ratio shown in our lastchart indicates that the US market is trading at a plausible multi-ple at the moment. Moreover, the current multiple is within themiddle range – albeit at the top end – of historical experience.

Once again, historic periods of overvaluation or undervalua-tion are clearly visible. Periods of extreme cheapness (1932,1942 and 1982) are defined by trend multiples of six to seventimes. Other major troughs (1938, 1974 and 2009?) are de-

fined by multiples in the 10–13 range. Extreme overvaluation isdefined by multiples of 30–40 times trend earnings (1929, 2000and arguably 2007).

Figure 6 also suggests that there have been “eras” of posi-tive or negative sentiment towards equities: the 1940s and1950s stand out as an era of low multiples, and so do the1970s. The 1960s are a period of optimism and, even moreobviously, so is the period from the mid-1990s to just before thefailure of Lehman Brothers. Perhaps it is no coincidence that1995 was precisely the moment when the technology sector exploded into life and productivity growth started to re-accelerate.

In summary, we would draw five conclusions from the pat-terns reviewed here. First, the long-term trend in US real earn-

1 Jeremy J. Siegel “What is an Asset Price Bubble? An Operational Defini-tion,” European Financial Management, 2003

Figure 5

US real equity returns deviations from trendSource: Credit Suisse




ings growth has been remarkably close to the long-term trend inproductivity growth, once you allow for a one-off level shift in realearnings just after World War I.

Taxation and a change in industry mix may partly account for the fact the dividend payout ratio has trended down since 1940or so, but, looking forward, it is more likely that real dividends andearnings will grow in line. Hence, past and expected future pro-ductivity growth may indeed help narrow the range of plausibleestimates for “trend” earnings and dividend growth – and byextension for cyclically adjusted or “trend” P/E. The real questionis whether the current extreme shock to earnings will cause an-other “permanent” downshift in the level of trend earnings.

Second, if you believe that America will likely renew itselfyet again and deliver trend productivity growth of 2% p.a. in thefuture then US equities are arguably closer to “fair value” thannormal, and nowhere near bubble territory. Equally, if you do notbelieve in “persistence,” they are indeed overvalued, but not quitein the sense that most analysts mean. Fundamentally, this ismore of a macro question than a micro one, in our view.

Third, if bad policy or sheer bad luck soon leads to a severerelapse into debt deflation followed perhaps by protectionismand capital controls – it is quite plausible to believe that the equityrisk premium will get stuck in an abnormally high range for manyyears. Or, to put it differently, trend multiples could get stuck inan abnormally “pessimistic” range of 7 13 times, even if pastproductivity trends did in fact persist. In round numbers, thistranslates to 400 800 for the S&P 500 over the next few years.Perversely, this might actually mean that the US market wasgenuinely cheap for those few longer-term investors who had thecourage and spare cash to increase equity weightings!

Fourth, given the size of the American market, its impor-tance to emerging country exports and the risk of protectionismin a bad scenario, investing in emerging equities would likelyprovide no hedge against a steep drop in US consumption, GDPand equity returns. Indeed, rather the opposite, as we saw in2008/09. Meaningful decoupling from disaster might just work in

20 years time, but not today when emerging world consumptionis still only 20% of the global total.

Fifth, for the rise of China, India and the other big emergingcountries to be sustainable it cannot in the end be a zero sumgame. Indeed, for both political and economic reasons it is almostcertainly impossible for a set of countries this big to becomeprosperous mostly by taking export market share from other (richer) countries. Their growth may, like the USA in the 19thcentury, be punctuated by some big upheavals, but the onlysustainable way for them to grow will be via domestic demandthat ultimately expands the global market for US and other devel-oped country exports. Once again, this leads us to a complexmacro judgment, not a microeconomic debate about valuation.

The next decade for US equities

The overriding common interest of China, India, Russia and thedeveloped world is to find technological and political solutions tothe challenges of energy security, climate change and the rebal-ancing of global demand. But free trade and free capital flowsdid not in fact survive the replacement of the UK by the USA asthe world’s leading economic power, and this directly contributedto the Great Depression and huge undershoot in global equityreturns of the 1930s. History warns that this could happenagain, despite a strong common interest in “mutually assuredprosperity.” However, this is just another way of saying that it ismacro factors rather than micro ones that are most germane tothe valuation debate.

When people assert that the market is overvalued, they arereally expressing their skepticism about the future of US produc-tivity growth and/or the future of globalization. Logically enough,

the reverse is also true: if you believe in the potential benefits ofaccelerating technological change and the dramatic rise of theemerging world, then the next decade for US equities is likely tobe a bright one.

Figure 6

US equity market P/E based on trend earningsSource: Credit Suisse

0

5

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15

20

25

30

35

40

Jan 1871 Jan 1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006

20.2

High

Current = 20.07.1

Low

13.1Medium

Current trend earnings:USD 59 (nominal)USD 52 (real)

0

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40

Jan 1871 Jan 1886 Jan-1901 Jan-1916 Jan-1931 Jan-1946 Jan-1961 Jan-1976 Jan-1991 Jan-2006

20.2

High

Current = 20.07.1

Low

13.1Medium

Current trend earnings:USD 59 (nominal)USD 52 (real)



P h o t o : i s t o c k p h o t o / d b l i g h t e




CREDIT SUISSE GLOBAL INVESTMENT RETURNS YEARBOOK 2010Country profiles_27

Guide to the country profiles

IndividualmarketsThe Credit Suisse Global Investment Returns Yearbookhas been expanded to cover 22 countries and regions,all with index series that start in 1900. Two countriesappear for the first time in the 2010 Yearbook: Finlandand New Zealand. Figure 1 shows the relative sizes of

world equity markets at our base date of end-1899.Figure 2 shows how they had changed by end-2009.Markets that are not included in the Yearbook datasetare colored in black. As these pie charts show, theYearbook covered 89% of the world equity market in1900 and 85% by end-2009.

In the country pages that follow, there are three chartsfor each country or region. The upper chart reports, for the last 110 years, the real value of an initial investmentin equities, long-term government bonds, and Treasurybills, all with income reinvested. The middle chartreports the annualized premium achieved by equitiesrelative to bonds and to bills, measured over the lastdecade, quarter-century, half-century, and full 110

years. The bottom chart compares the 110-year annualized real returns, nominal returns, and standarddeviation of real returns for equities, bonds, and bills.

The country pages provide data for 19 countries, listedalphabetically starting on the next page, and followed bythree broad regional groupings. The latter are a 19-country world equity index denominated in USD, ananalogous 18-country world ex-US equity index, and ananalogous 13-country European equity index. All equityindexes are weighted by market capitalization (or, in

years before capitalizations were available, by GDP). Wealso compute bond indexes for the world, world ex-USand Europe, with countries weighted by GDP.

Extensive additional information is available in theCreditSuisse Global Investment Returns Sourcebook 2010 .This 200-page reference book is available throughLondon Business School (see the inside back cover for contact details).The underlying data are availablethrough Morningstar Inc.

The Yearbook’s global coverageThe Yearbook contains annual returns on stocks, bonds, bills, inflation,and currencies for 19 countries from 1900 t o 2009. The countriescomprise two North American nations (Canada a nd the USA), eighteuro-currency area states (Belgium, Finland, France, Germany, Ireland,Italy, the Netherlands, and Spain), five European markets that areoutside the euro area (Denmark, Norway, Sweden, Switzerland, and theUK), three Asia-Pacific countries (Australia, Japan, and New Zealand),and one African market (South Afric a). These countries covered 89% of

global stock market capitalization in 1900 and 85% by the start of2010.

Figure 1

Relative sizes of world stock markets, end-1899

UK 30.5%

USA 19.3%France 14.3%

Other 3.6%

Other Yearbook 5.1%

Italy 1.6%

Canada 1.8%

Belgium 3.8% Austria-Hungary 3.5%

Russia 3.9%

Japan 4.0%

Germany 6.9%

Netherlands 1.6%

UK 30.5%

USA 19.3%France 14.3%

Other 3.6%

Other Yearbook 5.1%

Italy 1.6%

Canada 1.8%

Belgium 3.8% Austria-Hungary 3.5%

Russia 3.9%

Japan 4.0%

Germany 6.9%

Netherlands 1.6%

Figure 2

Relative sizes of world stock markets, end-2009

UK 8.7%

Japan 7.9%

Other 15.4%

Italy 1.6%

France 4.7%

Canada 3.6%

Australia 3.5%

Switzerland 3.1%Germany 3.3%

Spain 2.1%

Other Yearbook 5.2%

USA 41.0%

UK 8.7%

Japan 7.9%

Other 15.4%

Italy 1.6%

France 4.7%

Canada 3.6%

Australia 3.5%

Switzerland 3.1%Germany 3.3%

Spain 2.1%

Other Yearbook 5.2%

USA 41.0%

Source: Elroy Dimson, Paul Marsh and Mike Staunton, Credit Suisse Global InvestmentReturns Sourcebook 2010

Bibliography and data sources

1. Dimson, E., P. R. Marsh and M. Staunton, 2002, Triumph of theOptimists, NJ: Princeton University Press

2. Dimson, E., P. R. Marsh and M. Staunton, 2008, The worldwide equitypremium: a smaller puzzle, R Mehra (Ed.)The Handbook of the EquityRisk Premium, Amsterdam: Elsevier

3. Dimson, E., P. R. Marsh and M. Staunton, 2010, Credit Suisse GlobalInvestment Returns Sourcebook

4. Dimson, E., P. R. Marsh and M. Staunton, 2010, The Dimson-Marsh-Staunton Global Investment Returns Database, Morningstar Inc. (the“DMS” data module)




Belgium

At the heartof EuropeLithuania claims to lie at the geographical heart ofEurope, but Belgium can also assert centrality. It lies atthe crossroads of Europe’s economic backbone and itskey transport and trade corridors, and is theheadquarters of the European Union. In 2010, Belgium

was ranked the most globalized of the 181 countriesthat are evaluated by the KOF Index of Globalization.

Belgium’s strategic location has been a mixedblessing, making it a major battleground in two world

wars. The ravages of war and attendant high inflationrates are an important contributory factor to its poor long-run investment returns – Belgium has been one of

the two worst-performing equity markets and the sixth worst performing bond market.

The Brussels stock exchange was established in 1801under French Napoleonic rule. Brussels rapidly grewinto a major financial center, specializing during theearly 20th century in tramways and urban transport.

Its importance has gradually declined, and EuronextBrussels now ranks 26th among world exchanges bysize. It suffered badly during the recent banking crisis.

Three large banks made up over half its marketcapitalization at start-2008, but they now comprisearound one-tenth of the index. The three largeststocks at end-2009 were Anheuser-Busch, Fortis, andKBC.

Capital market returns for BelgiumFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 15.6 compared to 0.9 for bonds and 0.7 for bills. Figure 2 shows that, since 1900, equities beatbonds by 2.6% and bills by 2.9% per year. Figure 3 shows that t helong-term real return on Belgium equities was an annualized 2.5%compared to bonds and bills, which gave a real return of –0.1% and–0.3%, respectively. For additional explanations of these figures, seepage 27.

Figure 1

Annualized performance from 1900 to 2009

16

0.90.7

0

1

10

100

1900 10 20 30 40 50 60 70 80 90 2000 10

Equities Bonds Bills

Figure 2

Equity risk premium over 10 to 110 years

-5.7

2.92.61.0

0.6

-2.9

3.81.6

-10

-5

0

5

10

2000-2009 1985-2009 1960-2009 1900-2009

Premium vs Bonds (% p.a.) Premium vs Bills (% p.a.)

Figure 3

Returns and risk of major asset classes since 1900

23.7

8.0

2.5

12.0

5.2

-0.1

8.15.0

-0.3-5

0

5

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20

25

Real return (%) Nominal return (%) Standard deviation






Canada

ResourcefulcountryCanada is the world’s second-largest country by landmass (after Russia), and its economy is the tenth-largest.It is blessed with natural resources, having the world’ssecond-largest oil reserves, while its mines are leadingproducers of nickel, gold, diamonds, uranium and lead. Itis also a major exporter of soft commodities, especiallygrains and wheat, as well as lumber, pulp and paper.

The Canadian equity market dates back to the opening ofthe Toronto Stock Exchange in 1861 and is the world’sfifth-largest, accounting for 3.6% of world capitalization.

Given Canada’s natural endowment, it is no surprise that

oil and gas and mining stocks have a 35% weighting in itsequity market, while a further 26% is accounted for byfinancials. The largest stocks are currently Royal Bank ofCanada, Toronto-Dominion Bank and Suncor Energy.

Canadian equities have performed well over the long run, with a real return of 5.8% per year. The real return onbonds has been 2.0% per year. These figures areremarkably close to those for the United States.

Capital market returns for CanadaFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 479.5 c ompared to 9.1 for bonds and 5.8 for bills. Figure 2 shows that, since 1900, equities beatbonds by 3.7% and bills by 4.1% per year. Figure 3 shows that t helong-term real return on Canadian equities was a n annualized 5.8%compared to bonds and bills, which gave a real return of 2.0% and1.6%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


479

9.15.8

0

1

10

100

1,000

1900 10 20 30 40 50 60 70 80 90 2000 10


Figure 2


-2.0

2.8

4.13.71.5

-0.9

2.43.2

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-5

0

5

10

2000-2009 1985-2009 1960-2009 1900-2009


Figure 3


17.3

9.0

5.8

10.4

5.12.0

4.94.71.6

-5

0

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10

15

20

25







Denmark

HappiestnationIn a recent global survey of citizens’ happiness,Denmark was ranked “happiest place on earth,” closelyfollowed by Switzerland and Austria, with Zimbabwe,understandably, ranked “least happy.”

Whatever the source of Danish happiness, it does notappear to spring from outstanding equity returns. Since1900, Danish equities have given an annualized realreturn of 4.9%, which, while respectable, is below the

world return of 5.4%.

In contrast, Danish bonds gave an annualized real returnof 3.0%, the highest among the Yearbook countries.

This is because our Danish bond returns, unlike thosefor the other 18 countries, include an element of creditrisk. The returns are taken from a study by ClausParum, who felt it was more appropriate to usemortgage bonds, rather than more thinly tradedgovernment bonds. The country with the highest returnsfor truly default-free bonds is Sweden.

The Copenhagen Stock Exchange was formallyestablished in 1808, but can trace its roots back to thelate 17th century. The Danish equity market is relatively

small, ranking as the world’s 25th largest. It has a high weighting in healthcare (42%) and industrials (19%),and the largest stocks listed in Copenhagen are Novo-Nordisk, Danske Banking, and Vestas Wind Systems.

Capital market returns for Denmark Figure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 191.9 c ompared to 25.6 for bonds and 12.0 for bills. Figure 2 shows that, since 1900, equities beatbonds by 1.8% and bills by 2.5% per year. Figure 3 shows that t helong-term real return on Danish equities was a n annualized 4.9%compared to bonds and bills, which gave a real return of 3.0% and2.3%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


192

25.6

12.0

0

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10

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1,000

1900 10 20 30 40 50 60 70 80 90 2000 10


Figure 2


2.8 2.51.80.9

-0.1-0.1

2.23.2

-10

-5

0

5

10

2000-2009 1985-2009 1960-2009 1900-2009


Figure 3


20.8

9.0

4.9

11.7

7.03.0

6.16.32.3

-5

0

5

10

15

20

25







Finland

East meetsWestWith its proximity to the Baltic and Russia, Finland is ameeting place for Eastern and Western Europeancultures. This country of snow, swamps and forests –one of Europe’s most sparsely populated nations – waspart of the Kingdom of Sweden until sovereigntytransferred in 1809 to the Russian Empire. In 1917,Finland became an independent country.

The Finns have transformed their country from a farmand forest-based community to a diversified industrialeconomy operating on free-market principles. TheOECD ranks Finnish schooling as the best in the world.Per capita income is among the highest in Western

Europe. A member of the EU since 1995, Finland is theonly Nordic state in the euro currency area.

Finland excels in high-tech exports. It is home to Nokia,the world’s largest manufacturer of mobile telephones,

which is rated the most valuable global brand outsidethe USA. Forestry, an important export earner, providesa secondary occupation for the rural population.

Finnish securities were initially traded over-the-counter or overseas, and trading began at the Helsinki Stock

Exchange in 1912. Since 2003, the Helsinki exchangehas been part of the OMX family of Nordic markets. Atits peak, Nokia represented 72% of the value-weightedHEX All Shares Index, and Finland is a highlyconcentrated market. The lar gest Finnish companies arecurrently Nokia, Sampo, and Fortum. Nokia’s value fellduring 2009 by 20%, which damaged Finland’s stock-market performance.

Capital market returns for FinlandFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 250.6 a s compared to 0.7for bonds and 0.6 for bills. Fi gure 2 shows that, since 1900, equitiesbeat bonds by 5.4% and bills by 5.6% per year. Figure 3 shows t hatthe long-term real return on Finnish equities was an annualized 5.1% ascompared to bonds and bills, which gave a real return of –0.3% and–0.4% respectively. For additional explanations of these figures, seepage 27.

Figure 1


251

0.70.6

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1900 10 20 30 40 50 60 70 80 90 2000 10


Figure 2


-10.2

4.65.65.4

4.13.7

-7.6

5.5

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-5

0

5

10

2000-2009 1985-2009 1960-2009 1900-2009


Figure 3


30.4

12.9

5.1

13.8

7.1

-0.3

11.9

6.9

-0.4-5

0

5

10

15

20

25







France

EuropeancenterParis and London competed vigorously as financialcenters in the 19th century. After the Franco-PrussianWar in 1870, London achieved domination. But Parisremained important, especially, to its later disadvantage,in loans to Russia and the Mediterranean region,including the Ottoman Empire. As Kindelberger, theeconomic historian put it, “London was a world financialcenter; Paris was a European financial center.”

Paris has continued to be an important financial center while France has remained at the center of Europe,being a founder member of the European Union and theeuro. France is Europe’s second-largest economy and

the fifth-largest in the world. It has Europe’s secondlargest equity market, ranked fourth in the world. It hasthe fourth-largest domestic bond market in the world.

Long-run French asset returns have been disappointing.France ranks 16th out of the 19 Yearbook countries for equity performance, 15th for bonds and 18th for bills. Ithas had the third-highest inflation, hence the poor fixedincome returns. However, the inflationary episodes andpoor performance date back to the first half of the 20thcentury and are linked to the world wars. Since 1950,

French equities have achieved mid-ranking returns.

Capital market returns for FranceFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 27.8 compared to 0.8 for bonds and 0.04 for bills. Figure 2 shows that, since 1900, equities beatbonds by 3.3% and bills by 6.1% per year. Figure 3 shows that t helong-term real return on French equities was an a nnualized 3.1%compared to bonds and bills, which gave a real return of –0.2% and–2.8%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


28

0.8

0.04

0.01

0.1

1

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100

1900 10 20 30 40 50 60 70 80 90 2000 10


28

0.8

0.04

0.01

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1900 10 20 30 40 50 60 70 80 90 2000 10


Figure 2


-6.5

3.6

6.1

3.3

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1.1

-3.2

5.2

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-5

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2000-2009 1985-2009 1960-2009 1900-2009


Figure 3


23.6

10.6

3.1

13.1

7.0

-0.2

9.6

4.2

-2.8

-5

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Germany

Locomotiveof EuropeGerman capital market history changed radically after World War II. In the first half of the 20th century,German equities lost two-thirds of their value in WorldWar I. In the hyperinflation of 1922 – 23, inflation hit 209billion percent, and holders of fixed income securities

were wiped out. In World War II and its immediateaftermath, equities fell by 88% in real terms, whilebonds fell by 91%.

There was then a remarkable transformation. In the earlystages of its “economic miracle,” German equities roseby 4,094% in real terms from 1949 to 1959. Germanyrapidly became known as the “locomotive of Europe.”

Meanwhile, it built a reputation for fiscal and monetaryprudence. From 1949 to date, it has enjoyed the world’slowest inflation rate, its strongest currency (now theeuro), and the second best-performing bond market.

Germany is Europe’s largest economy. It lost its positionas the world’s top exporter to China, and is now rankedsecond biggest exporter in the world. Its stock market,

which dates back to 1685, ranks seventh in the world bysize, while it has the fifth-largest domestic bond marketin the world.

The German stock market retains its bias towardsmanufacturing, with weightings of 15% in consumer goods, 17% in industrials, 18% in basic materials, and14% in utilities (15.7%). The largest stocks areSiemens and E.ON.

Capital market returns for GermanyFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 25.2 as compared to 0.11for bonds and 0.07 for bills. Figure 2 shows that, since 1900, equitiesbeat bonds by 5.4% and bills by 5.8% per year. Figure 3 shows t hatthe long-term real return on German equities was a n annualized 3.0%as compared to bonds and bills, which gave a real return of –2.0% and–2.4%, respectively. 1922–23 is i ncluded only for real equity return.For additional explanations of these figures, see page 27.

Figure 1


Figure 2


-6.9

2.5

5.85.4

0.41.0

-4.0

3.2

-10

-5

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2000-2009 1985-2009 1960-2009 1900-2009


Figure 3


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Ireland

CelticTigerIreland gained its independence from the UnitedKingdom in 1922. However, stock exchanges hadexisted in Dublin and Cork since 1793, so in order tomonitor Irish stocks from 1900 (22 years beforeindependence), we constructed an index for Irelandbased on stocks traded on these two exchanges.

In the period following independence, neither economicgrowth, nor equity returns were especially strong. Duringthe 1950s, Ireland experienced large-scale emigration.It joined the European Union in 1973, and from 1987the economy improved.

The 1990s saw the beginning of unprecedentedeconomic success, and Ireland became known as theCeltic Tiger. By 2007, it had become the world’s fifth-richest country in terms of GDP per capita, the second-richest in the EU, and was experiencing net immigration.Over the period 1987 – 2006, Ireland had the second-highest real equity return of anyYearbook country.

Ireland is one of the smallest markets covered by theYearbook, and sadly, it has shrunk since 2006. Toomuch of the market boom was based on real estate,

financials and gearing, and Irish stocks fell 75% in realterms in 2007 – 08. At the end of 2006, the Irish markethad a 57% weighting in financials, but these fell by95% during 2007 – 08; by 2010 they represented just10% of the market. The tiger now has a smaller bite.

Capital market returns for IrelandFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 60.6 compared to 3.5 for bonds and 2.2 for bills. Figure 2 shows that, since 1900, equities beatbonds by 2.6% and bills by 3.1% per year. Figure 3 shows that t helong-term real return on Irish equities was an annualized 3.8%compared to bonds and bills, which gave a real return of 1.1% and0.7%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


61

3.52.2

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1900 10 20 30 40 50 60 70 80 90 2000 10


Figure 2


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2000-2009 1985-2009 1960-2009 1900-2009


Figure 3


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Japan

Birthplaceof futures

Japan has a long heritage in financial markets. Tradingin rice futures had been initiated around 1730 in Osaka,

which created its stock exchange in 1878. Osaka was tobecome the leading derivatives exchange in Japan (andthe world’s largest futures market in 1990 and 1991)

while the Tokyo stock exchange, also founded in 1878, was to become the leading market for spot trading.

From 1900 to 1939, Japan was the world’s second-best equity performer. But World War II was disastrousand Japanese stocks lost 96% of their real value. From1949 to 1959, Japan’s “economic miracle” began andequities gave a real return of 1,565%. With one or two

setbacks, equities kept rising for another 30 years.

By the start of the 1990s, the Japanese equity market was the largest in the world, with a 40% weighting inthe world index versus 32% for the USA. Real estatevalues were also riding high and it was alleged that thegrounds of the Imperial palace in Tokyo were worthmore than the entire State of California.

Then the bubble burst. From 1990 to 2009, Japan wasthe worst-performing stock market, losing two-thirds of

its value in real terms. Its weighting in the world indexfell from 40% to 8%. Meanwhile, Japan suffered aprolonged period of stagnation, banking crises anddeflation. Hopefully, this will not form the blueprint for other countries over the coming decade.

Despite the fallout from the bursting of the assetbubble, Japan remains a major economic power, withthe world’s second-largest GDP. It has the world’s third-largest equity market as well as its second-biggest bondmarket. It is a world leader in technology, automobiles,electronics, machinery and robotics, and this is reflectedin the composition of its equity market.

Capital market returns for JapanFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 63.4 as compared to 0.3for bonds and 0.1 for bills. Fi gure 2 shows that, since 1900, equitiesbeat bonds by 5.1% and bills by 5.9% per year. Figure 3 shows t hatthe long-term real return on Japanese equities was an annualized 3.8%as compared to bonds and bills, which gave a real return of –1.2%and –1.9%, respectively. For additional explanations of these figures,see page 27.

Figure 1


Figure 2


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Netherlands

Exchangepioneer

Although some forms of stock trading occurred inRoman times, organized trading did not take place until

transferable securities appeared in the 17th century.The Amsterdam market, which started in 1611, was the

world’s main center of stock trading in the 17th and18th centuries. A book written in 1688 by a Spaniardliving in Amsterdam (appropriately entitled Confusion deConfusiones) describes the amazingly diverse tacticsused by investors. Even though only one stock wastraded – the Dutch East India Company – they hadbulls, bears, panics, bubbles and other features ofmodern exchanges.

The Amsterdam Exchange continues to prosper today aspart of Euronext. It is the world’s 17th largest equitymarket and, over the years, Dutch equities havegenerated a mid-ranking real return of 4.9% per year.The Netherlands has traditionally been a low inflationcountry and, since 1900, has enjoyed the second-lowest inflation rate among theYearbook countries(after Switzerland).

The Netherlands has a prosperous open economy, which ranks 16th in the world. For a small country, theNetherlands hosts more than its share of major multinationals, including Unilever, Royal Dutch Shell,Philips, ArcelorMittal, Heineken, TNT, Ahold, AkzoNobel, Reed Elsevier and ING Group.

Capital market returns for the NetherlandsFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 200.7 c ompared to 4.4 for bonds and 2.2 for bills. Figure 2 shows that, since 1900, equities beatbonds by 3.5% and bills by 4.2% per year. Figure 3 shows that t helong-term real return on Dutch equities was an annualized 4.9%compared to bonds and bills, which gave a real return of 1.4% and0.7%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


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New Zealand

Purity andintegrityFor a decade, New Zealand has been promoting itselfto the world as “100% pure” and Forbes calls thismarketing drive one of the world's top ten travelcampaigns. But the country also prides itself onhonesty, openness, good governance, and freedom torun businesses. According to TransparencyInternational, New Zealand is perceived as the leastcorrupt country in the world. The Wall Street Journalranks New Zealand as the best in the world for business freedom.

The British colony of New Zealand became anindependent dominion in 1907. Traditionally, New

Zealand's economy was built upon on a few primaryproducts, notably wool, meat, and dairy products. It

was dependent on concessionary access to Britishmarkets until UK accession to the European Union.

Over the last two decades, New Zealand has evolvedinto a more industrialized, free market economy. Itcompetes globally as an export-led nation throughefficient ports, airline services, and submarine fiber-optic communications.

The New Zealand Exchange traces its roots to theGold Rush of the 1870s. In 1974, the regional stockmarkets merged to form the New Zealand StockExchange. In 2003, the Exchange demutualized, andofficially became the New Zealand Exchange Limited.The largest firms traded on the exchange are Fletcher Building, and Telecom Corporation of New Zealand.

Capital market returns for New ZealandFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 537.5 a s compared to 8.5for bonds and 6.2 for bills. Fi gure 2 shows that, since 1900, equitiesbeat bonds by 3.8% and bills by 4.1% per year. Figure 3 shows t hatthe long-term real return on New Zealand equities was an annualized5.9% as compared to bonds and bills, which gave a real return of 2.0%and 1.7% respectively. For additional explanations of these figures, seepage 27.

Figure 1


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Norway

Nordic oilkingdomNorway is a very small country (ranked 115th bypopulation and 61st by land area) surrounded by largenatural resources that make it the world’s fourth-largestoil exporter and the second-largest exporter of fish.

The population of 4.8 million enjoys the second-largestGDP per capita in the world and lives under aconstitutional monarchy outside the Eurozone (adistinction shared with the UK). The United Nations,through its Human Development Index, ranks Norwaythe best country in the world for life expectancy,education and standard of living.

The Oslo stock exchange (OSE) was founded asChristiania Bors in 1819 for auctioning ships,commodities and currencies. Later, this extended totrading in stocks and shares. The exchange now formspart of the OMX grouping of Scandinavian exchanges.

In the 1990s, the Government established its petroleumfund to invest the surplus wealth from oil revenues. Thishas grown to become the largest fund in Europe and thesecond-largest in the world. The fund investspredominantly in equities, and its asset value is now

comparable to that of the Oslo stock exchange.

The largest OSE stocks are Statoil, DnB NOR, andTelenor.

Capital market returns for NorwayFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 86.3 compared to 6.2 for bonds and 3.6 for bills. Figure 2 shows that, since 1900, equities beatbonds by 2.4% and bills by 2.9% per year. Figure 3 shows that t helong-term real return on Norwegian equities was an a nnualized 4.1%compared to bonds and bills, which gave a real return of 1.7% and1.2%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


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Spain

Key to Latin America

Spanish is the most widely spoken internationallanguage after English, and has the fourth-largestnumber of native speakers after Chinese, Hindi andEnglish. Partly for this reason, Spain has a visibility andinfluence that extends way beyond its SouthernEuropean borders, and carries weight throughout Latin

America.

The modern style of Spanish bullfighting is described asdaring and revolutionary, and that is an apt descriptionof real equity returns over the century. While the 1960sand 1980s saw Spanish real equity returns enjoying abull market and ranked second in the world, the 1930s

and 1970s saw the very worst returns among our countries.

Though Spain stayed on the sidelines during the two world wars, Spanish stocks lost much of their real valueover the period of the civil war during 1936–39, whilethe return to democracy in the 1970s coincided with thequadrupling of oil prices, heightened by Spain’sdependence on imports for 70% of its energy needs.

The Madrid Stock Exchange was founded in 1831 and it

is now the 11th largest in the world, helped by strongeconomic growth since the 1980s. The major Spanishcompanies retain strong presences in Latin Americacombined with increasing strength in banking andinfrastructure across Europe. The largest stocks areBanco Santander, Telefonica, and BBVA.

Capital market returns for SpainFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 58.7 compared to 4.5 for bonds and 1.5 for bills. Figure 2 shows that, since 1900, equities beatbonds by 2.4% and bills by 3.4% per year. Figure 3 shows that t helong-term real return on Spanish equities was a n annualized 3.8%compared to bonds and bills, which gave a real return of 1.4% and0.4%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


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Sweden

Nobel prizereturns

Alfred Nobel bequeathed 94% of his total assets toestablish and endow the five Nobel Prizes (first awardedin 1901), instructing that the capital be invested in safesecurities. Were Sweden to win a Nobel prize for itsinvestment returns, it would be for its achievement asthe only country to have real returns for equities, bondsand bills all ranked in the top three.

Real Swedish equity returns have been supported by apolicy of neutrality through two world wars, and thebenefits of resource wealth and the development, in the1980s, of industrial holding companies. Overall, theyhave returned 6.2% per year, behind the two highest-

ranked countries, Australia and South Africa.

The Stockholm stock exchange was founded in 1863and is the primary securities exchange of the Nordiccountries. It is the world’s 19th largest equity marketand, since 1998, has been part of the OMX grouping.The largest SSE stocks are Nordea Bank, Ericsson, andSvenska Handelsbank.

Despite the high rankings for real bond and bill returns,current Nobel prize winners will rue the instruction to

invest in safe securities as the real return on bonds wasonly 2.5% per year, and that on bills only 1.9% per year. Had the capital been invested in domestic equities,the winners would have enjoyed immense fortune as

well as fame.

Capital market returns for SwedenFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 730.9 c ompared to 14.5 for bonds and 8.2 for bills. Figure 2 shows that, since 1900, equities beatbonds by 3.6% and bills by 4.2% per year. Figure 3 shows that t helong-term real return on Swedish equities was an a nnualized 6.2%compared to bonds and bills, which gave a real return of 2.5% and1.9%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


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Switzerland

Traditionalsafe havenFor a small country with just 0.1% of the world’spopulation and 0.008% of its land mass, Switzerlandpunches well above its weight financially and winsseveral gold medals in the global financial stakes.

The Swiss stock market traces its origins to exchangesin Geneva (1850), Zurich (1873) and Basel (1876). It isnow the world’s eighth-largest equity market,accounting for 3.1% of total world value. Major listedcompanies include world leaders such as Nestle,Novartis and Roche.

Since 1900, Swiss equities have achieved a mid-ranking

real return of 4.3%, while Switzerland has been one ofthe world’s three best-performing government bondmarkets, with an annualized real return of 2.1%.Switzerland has also enjoyed the world’s lowest inflationrate: just 2.3% per year since 1900. Meanwhile, theSwiss franc has been the world’s strongest currency.

Switzerland is, of course, one of the world’s mostimportant banking centers, and private banking has beena major Swiss competence for over 300 years. Swissneutrality, sound economic policy, low inflation and a

strong currency have all bolstered the country’sreputation as a safe haven. Today, close to 30% of allcross-border private assets invested worldwide aremanaged in Switzerland.

Capital market returns for SwitzerlandFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 97.8 compared to 9.6 for bonds and 2.4 for bills. Figure 2 shows that, since 1900, equities beatbonds by 2.1% and bills by 3.4% per year. Figure 3 shows that t helong-term real return on Swiss equities was an annualized 4.3%compared to bonds and bills, which gave a real return of 2.1% and0.8%, respectively. For additional explanations of these figures, seepage 27.

Figure 1


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United States

FinancialsuperpowerIn the 20th century, the United States rapidly becamethe world’s foremost political, military, and economicpower. After the fall of communism, it became the

world’s sole superpower.

The USA is also a financial superpower. It has the world’s largest economy, and the dollar is the world’sreserve currency. Its stock market accounts for 41% oftotal world value, which is over five times as large as

Japan. The USA also has the world’s largest bondmarket.

US financial markets are also the best documented in

the world and, until recently, most of the long-runevidence cited on historical asset returns drew almostexclusively on the US experience. Since 1900, USequities and US bonds have given real returns of 6.2%and 1.9%, respectively.

There is an obvious danger of placing too much relianceon the excellent long run past performance of USstocks. The New York Stock Exchange traces its originsback to 1792. At that time, the Dutch and UK stockmarkets were already nearly 200 and 100 years old,

respectively. Thus, in just a little over 200 years, theUSA has gone from zero to a 41% share of the world’sequity markets.

Extrapolating from such a successful market can lead to“success” bias. Investors can gain a misleading view ofequity returns elsewhere, or of future equity returns for the USA itself. That is why thisYearbook focuses onglobal returns, rather than just those from the USA.

Capital market returns for the United StatesFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 726.6 c ompared to 8.2 for bonds and 2.8 for bills. Figure 2 shows that, since 1900, equities beatbonds by 4.2% and bills by 5.2% per year. Figure 3 shows that t helong-term real return on US equities was an annualized 6.2% comparedto bonds and bills, which gave a real return of 1.9% and 0.9%,respectively. For additional explanations of these figures, see page 27.

Figure 1


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World

GloballydiversifiedIt is interesting to see how the 19 Yearbook countrieshave performed in aggregate over the long run. We havetherefore created a 19-country world equity indexdenominated in a common currency, in which eachcountry is weighted by its starting-year equity marketcapitalization, or in years before capitalizations wereavailable, by its GDP. We also compute a 19-country

world bond index, with each country weighted by GDP.

These indexes represent the long-run returns on aglobally diversified portfolio from the perspective of aninvestor in a given country. The charts opposite showthe returns for a US global investor. The world indexes

are expressed in US dollars; real returns are measuredrelative to US inflation; and the equity premium versusbills is measured relative to US treasury bills.

Over the 110 years from 1900 to 2009, Figure 1 showsthat the real return on the world index was 5.4% per year for equities, and 1.7% per year for bonds. It alsoshows that the world equity index had a volatility of17.8% per year. This compares with 23.5% per year for the average country and 20.4% per year for the USA.The risk reduction achieved through global diversification

remains one of the last “free lunches” available toinvestors.

Capital market returns for WorldFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 331.4 a s compared to 6.4for bonds and 2.8 for bills. Fi gure 2 shows that, since 1900, equitiesbeat bonds by 3.7% and bills by 4.4% per year. Figure 3 shows t hatthe long-term real return on World equities was an annualized 5.4% ascompared to bonds and bills, which gave a real return of 1.7% and0.9% respectively. For additional explanations of these figures, seepage 27.

Figure 1


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Figure 2


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Premium vs Bonds (% p.a.) Premium vs US Bills (% p.a.)

Figure 3


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World ex-US

Rest of theworldIn addition to the two world indexes, we also constructtwo world indexes that exclude the USA, using exactlythe same principles. Although we are excluding just oneout of 19 countries, the USA accounts for roughly halfthe total equity market capitalization of our 19 countries,so the 18-country world ex-US equity index representsapproximately half the total value of the world index.

We noted above that, until recently, most of the long-run evidence cited on historical asset returns drewalmost exclusively on the US experience. We arguedthat focusing on such a successful economy can lead to“success” bias. Investors can gain a misleading view of

equity returns elsewhere, or of future equity returns for the USA itself.

The charts opposite confirm this concern. They showthat, from the perspective of a US-based internationalinvestor, the real return on the world ex-US equity index

was 5.0% per year, which is 1.2% per year below thatfor the USA. This suggests that, although the USA hasnot been a massive outlier, it is nevertheless importantto look at global returns, rather than just focusing on theUSA.

Capital market returns for the World ex-USFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 214.8 a s compared to 3.7for bonds and 2.8 for bills. Fi gure 2 shows that, since 1900, equitiesbeat bonds by 3.8% and bills by 4.0% per year. Figure 3 shows t hatthe long-term real return on World ex-US equities was an annualized5.0% as compared to bonds and bills, which gave a real return of 1.2%and 0.9% respectively. For additional explanations of these figures, seepage 27.

Figure 1


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Europe

The OldWorldThe Yearbook documents investment returns for 13European countries. They comprise eight euro currencyarea states (Belgium, Finland, France, Germany,Ireland, Italy, the Netherlands and Spain) and fiveEuropean markets that are outside the euro area(Denmark, Sweden and the UK; and from outside theEU, Norway and Switzerland). Loosely, we might arguethat these 13 countries come from the Old World.

It is interesting to assess how well European countriesas a group have performed, compared with our worldindex. We have therefore constructed a 13-countryEuropean index using the same methodology as for the

world index. As with the world index, this Europeanindex can be designated in any desired commoncurrency. For consistency, the figures opposite are inUS dollars from the perspective of a US internationalinvestor.

Figure 1 opposite shows that the real equity return onEuropean equities was 4.8%. This compares with 5.4%for the world index, indicating that the Old Worldcountries have underperformed. This may relate to thedestruction from the two world wars, where Europe was

at the epicenter; or to the fact that many of the NewWorld countries were resource-rich; or perhaps to thegreater vibrancy of New World economies.

Capital market returns for EuropeFigure 1 shows that, over the last 110 years, the real value of equities,

with income reinvested, grew by a factor of 167.9 a s compared to 2.5for bonds and 2.8 for bills. Fi gure 2 shows that, since 1900, equitiesbeat bonds by 3.9% and bills by 3.8% per year. Figure 3 shows t hatthe long-term real return on European equities was an annualized 4. 8%as compared to bonds and bills, which gave a real return of 0.8% and0.9% respectively. For additional explanations of these figures, seepage 27.

Figure 1


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PublisherCredit Suisse Group AGCredit Suisse Research InstituteParadeplatz 8CH-8070 ZurichSwitzerland

Imprint

Responsible authorsElroy Dimson, London Business School, [email protected] Marsh, London Business School, [email protected] Staunton, London Business School, [email protected]

Jonathan J. Wilmot, Credit Suisse, [email protected]

Editorial deadline3 February 2010

ISBN 978-3-9523513-2-1

The Credit Suisse Global Investment Returns Yearbook 2010 is distributed to Credit Suisse clients by the publisher, and to non-clients by London Business School. The ac-companying volume, which contains detailed tables, charts, listings, background, sources and references, is called the Credit Suisse G lobal Investment Returns Sourcebook2010. It is also distributed to Credit Suisse clients by the publisher, and to non-clients by London Business School. Please address requests to Patricia Rowham, LondonBusiness School, Regents Park, London NW1 4SA, United Kingdom, tel +44 20 7000 7000, fax +4 4 20 7000 7001, e-mail [email protected]. E-mail is preferred.

Copyright © 2010 Elroy Dimson, Paul Marsh and Mike Staunton. All rights reserved. No part of this document may be reproduced or used in any form, including graphic,electronic, photocopying, recording or information storage and retrieval systems, without prior written permission from the copyright holders. To obtain permission, contactthe authors with details of the required extracts, data, charts, tables or exhibits. In addition to citing this Yearbook, documents that incorporate reproduced or derived materi-als must include a reference to Elroy Dimson, Paul Marsh and Mike Staunton, Triumph of the Optimists: 101 Years of Global Investment Returns, Princeton University Press,2002. At a minimum, each chart and t able must carry the acknowledgement Copyright © 2010 Elroy Dimson, Paul Marsh and Mike Staunton. If granted permission, a copyof published materials must be sent to the authors at London Business School, Regents Park, London NW1 4SA, U nited Kingdom.

This document was produced by and the opinions expressed are those of Credit Suisse as of the date of writing and are subject to change. It has been prepared solely for information purposes and for the use of the recipient. It does not constitute an offer or an invitation by or on behalf of Credit Suisse to any person to buy or sell any security.Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individualcircumstances, or otherwise constitutes a personal recommendation to you. The price and value of investments mentioned and any income that might accrue may fluctuate andmay fall or rise. Any reference to past performance is not a guide to the future.The information and analysis contained in this publication have been compiled or arrived at from sources believed to be reliable but Credit Suisse does not make any represen-tation as to their accuracy or completeness and does not accept liability for any loss arising from the use hereof. A Credit Suisse Group company may have acted upon theinformation and analysis contained in this publication before being made available to clients of Credit Suisse.Investments in emerging markets are speculative and considerably more volatile than investments in established markets. Some of the main risks are political risks, economicrisks, credit risks, currency risks and market risks. Investments in foreign currencies are subject to exchange rate fluctuations. Before entering into any transaction, you shouldconsider the suitability of the transaction to your particular circumstances and independently review (with your professional advisers as necessary) the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.This document is issued and distributed in the United States by Credit Suisse Securities (USA) LLC, a U.S. registered broker-dealer; in Canada by Credit Suisse Securities(Canada), Inc.; and in Brazil by Banco de Investimentos Credit Suisse (Brasil) S.A. This document is distributed in Switzerland by Credit Suisse, a Swiss bank. Credit Suisse isauthorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This document is issued and distributed in Europe (except Switzerland) by Credit Suisse(UK) Limited and Credit Suisse Securities (Europe) Limited, London. Credit Suisse Securities (Europe) Limited, London and Credit Suisse (UK) Limited, both authorized and

regulated by the Financial Services Authority, are associated but independent legal and regulated entities within the Credit Suisse. The protections made available by the UK’sFinancial Services Authority for private customers do not apply to investments or services provided by a person outside the UK, nor will the Financial Services CompensationScheme be available if the issuer of the investment fails to meet its obligations. This document has been issued in Asia-Pacific by whichever of the following is the appropriatelyauthorized entity of the relevant jurisdiction: in Hong Kong by Credit Suisse (Hong Kong) Limited, a corporation licensed with the Hong Kong Securities and Futures Commis-sion or Credit Suisse Hong Kong branch, an Authorized Institution regulated by the Hong Kong Monetary Authority and a Registered Institution regulated by the Securities andFutures Ordinance (Chapter 571 of the Laws of Hong Kong); in Japan by Credit Suisse Securities (Japan) Limited; elsewhere in Asia-Pacific by whichever of the following isthe appropriately authorized entity in the relevant jurisdiction: Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities(Malaysia) Sdn Bhd, Credit Suisse Singapore Branch and elsewhere in the world by the relevant authorized affiliate of the above.This document may not be reproduced either in whole, or in part, without the written permission of the authors and CREDIT SUISSE. © 2010 CREDIT SUISSE GROUP AG

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